Utile Maritime Legislation Enacted in Marshall Islands

'Financing Charters' may now be treated as 'Preferred Mortgages' — The Republic of the Marshall Islands passes Maritime Amendment Act (No. 1), 2013.

The Republic of the Marshall Islands’ Nitijela has passed the Maritime Amendment Act (No. 1), 2013 – a legislative initiative of key significance to the international marine finance community.

The first-of-its-kind legislation permits a “financing charter” to be treated as a preferred mortgage in favor of the registered owner of a Marshall Islands vessel, which allows a charter party to make precautionary security filings to protect and perfect its interest in a chartered vessel. This solves the long-standing issue in maritime finance where a charter party could lose its interest in a chartered vessel for lack of perfection if its charter were recharacterized as a security agreement.

Although the Marshall Islands is the first country to pass legislation of this kind, the new bill was conceived as an initiative applicable to all vessel registries, and is the product of a working group of the Marine Finance Committee of the Maritime Law Association of the United States (“MLA”), under the leadership of Vedder Price, New York shareholder Francis X. Nolan III.

Mr. Nolan, the measure’s principal draftsman, is the current chair of the Marine Finance Committee and a member of the MLA’s Board of Directors. Mr. Nolan thanks his fellow Committee Members, Bruce King, Marjorie Krumholz and Lawrence Rutkowski, for their input into the development and passage of the new Act.

The legislation amends the Marshall Islands Maritime Law to enable equipment lessors who provide lease financing of vessels the same security in collateral enjoyed by finance lessors of non-maritime property. A lessor under a financing charter filed pursuant to this amendment will enjoy the same priority as a mortgagee currently enjoys under a preferred mortgage.

A title holder may now perfect its security interest in a leased vessel in a manner similar to how lessors of other property may perfect security interests under the Uniform Commercial Code, as well as 49 U.S.C. Sections 11301 (as to rolling stock and appurtenances) and 44107 (as to aircraft and appurtenances). The new law is also consistent with the provisions and rationale underlying the Convention on International Interests in Mobile Equipment (Capetown, November, 2001) with respect to aircraft, railcars and space vehicles.

For purposes of the legislation, a “financing charter” is considered to be any “contract in the form of a demise or bareboat charter” covering a vessel which is “agreed by the parties to be or is determined in judicial or arbitral proceedings to create in favor of the documented owner a security interest in the vessel granted by the finance charterer.” The new legislation provides for filing requirements for a financing charter that are consistent with filing requirements for more traditional Marshall Islands preferred mortgages, including that the financing charter be signed and acknowledged by the parties and contain recitals on the amount secured, vessel particulars and full names and addresses of the parties.

It is important to note that the agreement between owner and charterer, that a charter constitutes a “financing charter,” is not binding on third parties. In this way, the new provision allows parties the flexibility of precautionary filings where there is a risk of recharacterization by a court that a charter is, in fact, a security agreement.

Mr. Nolan commented that “this statute offers an opportunity to expand a broad array of leasing products in the marine space with the security interest protections parallel to those afforded to lessors in aircraft and railcar finance. The passage of this legislation in one of the premier fast-growing ship registry jurisdictions follows years of effort by our Committee, the active support of the MLA and Vedder Price, and the keen appreciation by International Registries of a good idea whose time has finally arrived.” He added that “The MLA supports and encourages the Marine Finance Committee as a forum to exchange knowledge on the newest developments and practices in international and domestic ship finance and as an incubator of cutting-edge ideas.”